Virtu’s Option Market Making: The “Record Year” That Wasn’t
With the latest data in hand, Alphacution follows up on Virtu's claim of "another record year in options market making in 2022."
About Virtu’s “Record Year” in Options Market Making
Virtu's "record year in options market making" claim is not possible in terms by which real option market makers operate...
Case Study: History of Jane Street
"I don't stop when I'm tired, I stop when I'm done." - James Bond Alphacution publishes its 125-page, 149-exhibit, 26,000-word case study, "History of Jane Street," with notable expansions into regional, US option strategy and revenue estimation details. The following is the Opening to that report with Table of Contents, including download of the full Executive Summary. Access to this report is available to Premium Subscribers. Subscription and individual report purchase inquiries can be directed to info@alphacution.com. NOTE: No representative of Alphacution has been in contact with any representative of Jane Street Group, LLC or affiliated entities for the preparation of this report. This report is solely based on the author’s interpretation of Alphacution’s ongoing assembly of raw, open-access data; library of contextualized modeling; and, internally-developed content. This report does not benefit from, nor include, any material non-public information (MNPI). Introduction Volatility... It’s like the highest-octane fuel in the engine of every proprietary trading and market making firm – and it is very difficult to capture, harvest or [...]
Marketquake: The Volatility of Volatility
“To develop a complete mind: Study the art of science; study the science of art. Learn how to see. Realize that everything connects to everything else” – Leonardo da Vinci If there was ever a moment in time when we realized just how much everything connects to everything else - a quote (and concept) I have been using to repeatedly bludgeon you lo these many past months - now would be that moment. However, so as not to jump on the singularly overcrowded bandwagon of doom that is the current events flow of content (for now), I'd like to walk through a storyboard of related significance. That sadly familiar aroma in the air is fear; a specific vintage of which has not washed over the market ecosystem since 2008. Many are coming to the conclusion that if the virus doesn't take us down, the arsenal of preventative measures just might - and therefore, one way or another, we are likely entering a period of financial stress (to put it as [...]
Tower Research Capital: The Joy of Spoofing
On November 7, 2019, the U.S. CFTC (Commodity Futures Trading Commission) announced that it was ordering proprietary trading firm, Tower Research Capital, LLC (TRC), to pay $64.7 million in restitution, disgorgement and penalties for what amounts to the "largest total monetary relief ever ordered in a spoofing case." Apparently, this is all due to activity in equity index futures (at least) between March 2012 and December 2013. Now, this is one of those slippery - and potentially toxic - topics where someone ends up getting pissed off by whatever I say next. But, hey, it's Thanksgiving season, the Arctic blast has arrived 3 months early, and someone's likely to get pissed off anyway... Actually, this is a topic I have much to say about, and maybe even more questions than answers. For instance, why is so much of the spoofing / layering litigation on the futures side? (Is there no spoofing in equities? Or, just harder to find?) And, why does it take so long? We're nearly six years past [...]
Virtu Financial: Q3 2019 Update #1
“Making mountains out of molehills sells more books than a study of molehills." - Cliff Asness With Virtu's Q3 2019 earnings out this past Monday (Nov 5), but the Q3 2019 13F report coming out next week, we are going to keep most of our powder dry for this one. However, since much of what we are trying to do here is convert new information into new "shapes" - and therefore, take the occasional opportunity to conserve our words - we offer a couple updated pictures. You might draw your own conclusions... One thing's for sure, the concentration of market making and trading related revenue has been notably diluted since the closing of the ITG acquisition in March (2019). More coming over the next couple weeks...
Virtu Financial: The Frying Pan and the Fire
"If you are not growing, you are dying." - Tony Robbins On August 8, Virtu reported Q2 earnings and the stock (VIRT) fell 18%. Non-GAAP EPS came in lower than Street estimates. In addition to the costs of integrating the ITG acquisition, disappointing results in the market making segment were blamed on lower volatility and trading volumes. Now, here's what you're never going to hear from the company: The Frying Pan: Both the market making and execution businesses are under significant spread and fee pressure. If there isn't an ongoing arms race for speed - which there still is - then there's intense competition around execution costs. Payments for order flow continue to rise as a result. And, some are exiting the equities brokerage business... 2. The Fire: They claim to be diversified. They try to become more diversified. And yet, they remain grossly over-weighted to equities and ETFs. The increased balance sheet that resulted from the KCG acquisition has not been lightened up, now 2 years later, despite [...]
When Market Makers Ate Their Own…
Right out of the gate, this story might emit a whiff of last year's news. Maybe. But, that sense would only last until you realize that this is also a template for improving predictions about future events. And, that kind of predictive power relies upon the bet that more markets and opportunities are becoming winner-take-all in the digital era... (Hint: As the functioning of markets - and other economic opportunities - become more "digital," a single leader can emerge in that market. This is how we end up with the "FANG's" - Facebook, Amazon, Netflix and Google. It's also how US equity markets end up with ~80% lit market-making flows being split between Virtu and Citadel. Here are some facts to fill in the background: In the three years beginning 2006, the Timber Hill market making unit of Interactive Brokers Group (IB) had an annual revenue run rate of around $1 billion, peaking at over $1.3 billion in 2008. By 2017, Timber Hill's revenue run rate had declined 94% to [...]
Riffs Ep 4 – What Do Hedge Fund Managers Spend on Technology?
Set aside some time to watch Alphacution Riffs Ep 4 wherein we walk through the foundational hypothesis; key highlights; an extraordinary case study involving Citadel, Millennium Management, Point72 and Vanguard (teaser); and, the strategy behind the release of our latest - and, most impactful - study to date, "The Context Machine: Estimating Asset Manager Technology Spending" (April 2018). And, for those of you with a slightly longer attention span, stick around for another "public service announcement" at the end of this one (starting around 11:17) - as we did in the Director's Cut for Ep 3 - Proprietary Trading, Extreme Automation. The urge to provide value to the human capital component (i.e. - you, me, and everyone in our audience and beyond) - which is actually coming to life as a direct result of our technology focus - seems to be gaining momentum... Enjoy... And, as always, if you value this work: Like it, share it, comment on it - or discuss amongst yourselves - and then send us feedback@alphacution.com. [...]
Virtu Financial: More Acquisitions on the Way, If…
When we launched our first trading program at Quantlab in the late 90's, we didn't have direct market access yet. We generated an order list (overnight) that was worked throughout the subsequent market session at the discretion of an algo-equipped executing broker; some of whom now roam the halls at Jefferies / Leucadia. This was the era when 1- to 3-day portfolio turnover was considered fast - SOES bandits were still a thing - and Schwab would soon acquire electronic trading pioneer, CyBerCorp, from Philip Berber - a short drive down the road from our Houston headquarters in Austin, TX. Of course, everyone had nicknames then - as I suspect they still do now. Ed Bosarge, founder of what eventually became Quantlab (after at least 3 prior related incarnations that began for me around 1996), was known as Dr. Evil. Let's just say it's a hair-raising story about a swashbuckling pioneer of applied math involving a hideous toupee... I was known as Mr. Bigglesworth - or, "Bigsy" for short. No [...]
